US Fed warns against currency wars

A top US Federal Reserve official waded into the sticky debate over global currency wars on Friday, warning that such beggar-thy-neighbour monetary policies would only hurt world trade and the economies that were involved.

Philadelphia Federal Reserve Bank President Charles Plosser said central banks in many countries are adopting policies, often under pressure from governments, to control their currencies, calling it an unhealthy phenomenon.

"We do not want to get ourselves in a world where you have currency wars. Beggar-thy-neighbor policies ... would not be healthy," Plosser told a bankers conference here.

"So central banks and governments need to be cautious about allowing us to slip into a regime like that because that would not be healthy for world trade or for the economies" involved, he added.

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Easy money policies by major central banks such as the Fed or European Central Bank often strengthen currencies of developing countries, hurting those countries' exporters. That in turn has prompted some governments or central banks to ease their own polices in response.

The comments from Plosser - a long-time critic of the Fed's easy money policies, though largely for domestic reasons - come on a day newly elected Japanese Prime Minister Shinzo Abe made his biggest push yet to make jobs growth part of the Bank of Japan's mandate.

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Under intense pressure from Abe, the BOJ will likely adopt a 2 per cent inflation target later this month, double its current goal, and consider easing monetary policy again, most likely by increasing government debt and asset purchases, sources told Reuters this week.

Besides Japan, Switzerland, Brazil and China have all taken steps to push down the value of their currencies in recent years. The Fed, ECB and Bank of England have depressed their interest rates over long periods in the wake of the global recession, and pumped trillions of dollars into their economies.

"Many countries are trying to use monetary policies to control their currencies, to protect their countries from fluctuating currencies," Plosser said.

"I think that's a maybe a short-run strategy but not necessarily a healthy long-run strategy."

His comments echoed those of BoE Governor Mervyn King, who last month warned that the trend of currency wars could grow.

Picking apart Fed policies

Turning to US monetary policies, Plosser outlined other ways the Fed's actions could backfire.

The aggressive policy accommodation may be frustrating Americans' efforts to restore their personal wealth and may actually slow a broader rebound in US consumption, he warned.

"Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households' efforts to rebuild their balance sheets without stimulating aggregate demand or consumption," Plosser, who does not have a vote on Fed policy this year, told the bankers.

Now more than three years after the recession ended, households will nonetheless take time to restore wealth to a comfortable level, Plosser added, "and attempts to increase economic 'stimulus' may not help speed up the process and may actually prolong it."

Last month, the Fed ramped up asset purchases that are meant to spur growth and pledged to keep rates near zero until the unemployment rate drops to 6.5 per cent, as long as inflation expectations don't climb above 2.5 per cent.

US unemployment was a lofty 7.8 per cent last month.

The US economy grew at a decent 3.1 per cent annual rate in the third quarter but growth is expected to have slowed in the final months of the year. Last month, Fed policymakers said they expected GDP growth of between 2.3 to 3.0 per cent this year, and 3.0 to 3.5 per cent in 2014.

US retail sales have been sluggish, rising 0.3 per cent in November after a drop of 0.3 per cent the month before.

Among a minority of so-called hawks at the central bank, Plosser also largely repeated predictions for a pick-up in US economic growth to about 3 per cent this year and in 2014. He also expects unemployment to fall to near 7 per cent by the end of 2013, from 7.8 per cent last month.

Plosser characterized the pace of US economic growth as "moderate," and predicted that fourth-quarter growth was likely near 2 per cent.

Turning to the US fiscal situation, the policymaker said the lingering uncertainty over government spending and taxes is weighing on business hiring. The Fed is probably not helping on this front, either, Plosser said.

"Here, too, in my view, monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved," he said.

Facing the so-called fiscal cliff, US lawmakers on Jan. 1 struck a partial deal that avoids the worst of the planned tax rises but put off big decisions on spending cuts for two more months.